Cigarette Smugglers Profit from Disparity in State Cigarette Taxes

January 22, 2013

Channeling their Prohibition-era predecessors, smugglers have found significant profits moving cigarettes across state lines.  The difference in each state's cigarette tax has created a lucrative criminal enterprise, say Joseph Henchman and Scott Drenkard of the Tax Foundation.

  • A report by the Mackinac Center for Public Policy found that most states witness a surge in smuggling after adopting a cigarette tax rate increase.
  • States adjacent to states with recent tax increases have also experienced a decline in the rate of cigarette smuggling.

New York state leads the country in cigarette running with the highest net rate of smuggled cigarettes at 60.9 percent of the total market. With a state cigarette tax of $4.35 per pack, the highest in the country, New York's increase in cigarette smuggling since 2006, 170 percent, has mirrored the 190 percent rise in its tax rate.

  • Smuggling occurs when trucks are hijacked, counterfeit state tax stamps are made, officials turn a blind eye or counterfeit cigarettes are sold.
  • The Mackinac Center's report cites examples of police corruption, smuggling by prison guards and violence related to smuggling disputes.

In response to the unintended consequences of a disparity in state cigarette tax rates, policy responses have focused on securing transportation, greater law enforcement activity, changing tax rates and limiting the sale of duty-free cigarettes on tribal reservations.

  • Texas has a cigarette tax rate of $1.41 per pack. In 2011, 33.8 percent of its total market was smuggled in, which represents a 244 percent increase over 2006.
  • Florida has a cigarette tax rate of $1.339 per pack. In 2011, 19.1 percent of its total market was smuggled in, which represents a 294 percent increase over 2006.
  • New Hampshire has a cigarette tax of $1.68 per pack. In 2011, 26.8 percent of its total was smuggled out of the state, which represents a 110 percent increase over 2006.

Source: Joseph Henchman and Scott Drenkard, "Cigarette Taxes and Cigarette Smuggling by State," Tax Foundation, January 10, 2013. Michael D. LaFaive and Todd Nesbit, "Higher Cigarette Taxes Create Lucrative, Dangerous Black Market," Mackinac Center, January 8, 2013.

 

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